Detroit Won’t Run Out of Cash as Council Clears Lawyer Deal

By Chris Christoff -
Dec 11, 2012

The Detroit City Council approved a
$300,000 contract for a law firm to advise it on a recovery
plan, clearing the way for Michigan to release $30 million to
stabilize municipal finances and ensure that the city won’t run
out of cash this month.

The decision today to hire Miller Canfield Paddock & Stone
Plc was part of a November agreement with the state to avert the
possibility of an emergency manager takeover. The firm was named
in the agreement at the insistence of Mayor Dave Bing. The city,
whose annual budget is $1.6 billion, continues to amass a
deficit that may top $400 million by June.

The council had balked at the contract with Miller
Canfield, saying the firm’s role in designing the agreement was
a conflict of interest. It was the most contentious of some 20
measures required before the state would release money from a
$137 million bond sale.

Bing had warned that without the state money, he’d fire as
many as 500 workers and place others on unpaid furloughs in
January. The $30 million won’t solve the deficit, which grows
despite steps including a 10 percent pay cut for city workers.
Bing’s administration has struggled to implement a five-year
plan to wipe out the deficit.

Financial Review

State Treasurer Andy Dillon said yesterday that he’ll begin
another financial review of Detroit, citing slow progress under
the consent agreement that was supposed to speed financial
repairs and reduce spending.

That review may lead to appointment of an emergency
manager.

Michigan’s largest city has at least $12 billion in long-
term debt, and lost one-quarter of its population since 2000.

Detroit’s bond ratings were cut deeper into noninvestment
grade last month by Moody’s Investors Service, which cited the
possibility of bankruptcy or default within two years. The
rating company dropped general-obligation unlimited tax bonds
and certificates of participation one step to Caa1, seven steps
below investment grade, from B3. It cut general-obligation
limited tax debt to Caa2 from Caa1, and lowered ratings on water
and sewer revenue securities.

On Nov. 6, Michigan voters repealed a 2011 law that gave
state-appointed emergency managers sweeping power to fix the
finances of distressed cities, including authority to sell
assets and cancel union contracts. Emergency managers in five
cities and three school districts are functioning under a 1990
law that gives them less power.

Republican Governor Rick Snyder has asked lawmakers to
approve a new emergency manager law that would give distressed
cities and school districts four options -- emergency managers,
bankruptcy, consent agreements such as Detroit’s or mediation
with creditors. Emergency managers would have many powers they
held under the repealed 2011 law, although they could be removed
by local elected bodies after a year.